The Securities and Exchange Board of India (SEBI) has proposed partially reverting to the earlier volume-weighted average price (VWAP) methodology for derivatives settlement after a rather tumultuous beginning to the new Closing Auction Session (CAS) system.
The regulator has proposed a set of changes to the CAS introduced last month, including an option to temporarily return to the previous VWAP-based settlement method on expiry days, tighter rules for orders placed away from the reference price and shorter trading windows after the closing auction.
The proposals come after SEBI reviewed the initial experience with CAS and received feedback from stock exchanges, brokers, institutional investors and other market participants. CAS was introduced on August 3 for stocks that have derivatives contracts, replacing the earlier system under which closing prices were based on the VWAP of trades during the last 30 minutes of continuous trading.
One of the key changes under consideration is the way index and single-stock derivatives are settled on expiry days. SEBI has proposed two alternatives.
Under the first, called Blended VWAP, the settlement price would be based on actual trades during the last 30 minutes of continuous trading and the 10-minute CAS. The contribution of each period would depend on the actual traded value, rather than a fixed weight being assigned to CAS.
The second option would temporarily return to the Closing Trade Session (CTS) VWAP method, under which only trades during the last 30 minutes of continuous trading would be used for settlement. CAS transactions would not be included initially. SEBI said the market could move to the blended method after at least one year, provided there is sufficient liquidity and participation in CAS and traders have become familiar with the auction mechanism.
The review follows concerns that derivatives trading remains heavily concentrated near the market close. On expiry days, the average premium traded per minute during the 3:20-3:30 pm CAS period rose to Rs 189.82 crore on NSE and Rs 288.94 crore on BSE, compared with Rs 126.31 crore and Rs 141.48 crore, respectively, during the 3-3:30 pm period before CAS.
Indicative index value
SEBI has also proposed stopping the dissemination of the Indicative Index Value (IIV) during CAS while continuing to provide the Indicative Equilibrium Price (IEP) for individual securities.
The regulator said the IEP is an evolving price based on orders in the auction book and does not represent an actual trade. Similarly, an index value derived from such IEPs does not mean that the index has actually traded at that level. SEBI said such indicative index movements may be misinterpreted by market participants and used to take positions in derivatives.
Shorter auction transition
SEBI has proposed two alternatives for market timings.
Under Option A, continuous trading for CAS stocks would continue until 3:30 pm, followed by a one-minute transition period. The CAS would run from 3:31 pm to 3:40 pm, while derivatives trading would continue until 3:45 pm.
Under Option B, the current 3:15 pm cut-off for continuous trading in CAS stocks would remain. CAS would run from 3:15 pm to 3:25 pm and derivatives trading would end at 3:30 pm.
In both options, SEBI proposes reducing the transition period between continuous trading and CAS from five minutes to one minute. It also proposes cutting the post-CAS derivatives trading window from 10 minutes to five minutes.
Tighter order rules
SEBI has proposed that the existing ±3% CAS price band should remain. However, orders placed beyond 1% and up to 3% of the reference price would not be allowed to be cancelled during CAS.
Such orders could only be modified in a price-improving direction — a higher price for a buy order and a lower price for a sell order. Orders within ±1% would continue to have the existing cancellation flexibility.
The regulator has also proposed allowing unexecuted Iceberg orders from the continuous trading session to move into CAS. Their entire pending quantity would be converted into a normal limit order and disclosed in the CAS order book, potentially increasing liquidity and transparency during the auction.
SEBI has invited public comments on the seven proposals until October 3, 2026.